Why gold prices recorded their biggest drop in two years

On April 22, local time in the United States, spot gold fell by 2.8% to a low of $2,324.96 per ounce, with an intraday drop of nearly $70 per ounce, marking the largest intraday decline since June 2022.

Not only that, on the same day, the New York COMEX June gold futures closed down 2.79% at $2,346 per ounce, setting a new closing low since April 5, and recording the largest daily drop since February 3, 2023.

Affected by the international market, on April 23, Chinese precious metal futures continued to decline, with the Shanghai gold main contract falling 3.43% to 545.48 yuan per gram; the Shanghai silver main contract fell 4.63%, reporting 7,000 yuan per kilogram.

In the A-share market, gold stocks experienced a general correction. As of press time, Zhongrun Resources fell nearly 6%, while Sichuan Gold and Western Gold both fell by more than 4%.

This is contrary to the previous trend of gold prices. Prior to April 19, over the two months, international gold prices rose by 20%, breaking through $2,400 per ounce.Jerry Chen, a senior analyst at Jia Shen Group, believes that geopolitical factors are the main drivers behind the decline in gold prices overnight. Recent developments in the Middle East situation indicate that both Iran and Israel are striving to avoid a full-scale conflict.

According to the English version of Xinhua News Agency, Iranian Foreign Ministry spokesman Kanani said on April 22 that Iran believes its retaliatory actions against Israel have ended and the objectives have been achieved. Kanani, when commenting on potential countermeasures Iran might take against Israel, stated that necessary actions have been taken and no further actions are required for this incident.

Previously, as reported by Xinhua News Agency, the consular section of the Iranian Embassy in Syria was attacked by an Israeli airstrike on April 1. After the incident, Iran's Supreme Leader Khamenei and President Raisi clearly expressed their intention to retaliate against Israel for the attack.

Gold has multiple attributes such as consumption, investment, and risk aversion. Driven by speculation and the sentiment of global central bank purchases, various investment banks remain optimistic about the gold price trend. UBS, Goldman Sachs, and Bank of America believe that the international gold price will rise to $2,500 per ounce, $2,700 per ounce, and $3,000 per ounce, respectively.

The gold market is influenced by actual interest rates and various macroeconomic factors. Compared to these factors, geopolitical uncertainty is stronger and has a greater impact on the volatility of gold prices.Apart from risk-aversion factors, the market is now focusing on interest rate factors.

From an investment perspective, the U.S. real interest rate is a primary factor affecting international gold prices. Generally speaking, when U.S. real interest rates decline, the price of gold tends to rise. This is because gold can be considered a non-yielding asset; the real interest rate in the U.S. represents the cost of holding gold, and a decrease in this cost boosts the price of gold.

Timothy Moe, Chief Equity Strategist for Asia Pacific at Goldman Sachs, stated at a media briefing on April 23 that due to the stronger-than-expected U.S. economy, it is anticipated that the Federal Reserve will only cut interest rates twice in 2024.

Jerry Chen also believes that the Federal Reserve will delay the timing and magnitude of rate cuts, which is due to the fact that U.S. inflation has not yet stabilized. He estimates that the latest U.S. Personal Consumption Expenditure (PCE) data will slightly increase from 2.5% to 2.6%, while the core PCE is expected to drop from 2.8% to 2.6%.

In the view of some market participants, as the market continues to push back expectations for the Federal Reserve's monetary easing cycle, precious metals may be forced to adapt to a long-term environment of higher interest rates. This situation is generally unfavorable for gold prices, as it does not pay interest to investors.However, Shi Cheng, a precious metals and non-ferrous metals researcher at Huatai Futures, stated that as long as the upward trajectory of inflation does not trigger expectations of interest rate hikes by the Federal Reserve, it would be beneficial for precious metals. This is because, regardless of the circumstances, nominal interest rates are expected to decrease in the future, making the timing of the Federal Reserve's rate cuts less significant.

The latest meeting minutes from the Federal Reserve indicated that participants generally recognized the uncertainty surrounding the persistence of high inflation, but recent data did not bolster their confidence in inflation's continued movement towards the 2% target. They also mentioned that the process of disinflation is ongoing, albeit with some "bumps" along the way.

Data from TD Securities showed that although futures purchases by systematic trend-following traders have driven up gold prices, their long positions are now nearing their limit. This implies that they are less likely to push gold prices up significantly further.

UBS stated that once the Federal Reserve begins to cut interest rates around the middle of the year, ETF gold buyers would re-enter the market, as they often act in sync with interest rate adjustments.

Furthermore, Goldman Sachs also indicated that the main driving force behind the rise in gold prices is the demand for additional physical gold. The accumulation of gold in emerging markets may continue, and retail gold purchases in Asia are expected to increase, which will provide further momentum for the continued rise in gold prices.